Once it probably came from the other depositors in your bank.
Then our demand for mortgages outgrew depositors funds (which in any event had shrunk) and many of our mortgages became funded from overseas, including some of those sold by banks and all of those sold by organisations such as Aussie, RAMS, Members Equity etc.
The foreigners - in Europe, China, wherever - bought bundled-up groups of "securitised" mortgages and agreed to come up with the money for a set period of time in return for the mortgage payments.
Then the foreigners got scared and stopped funding new Australian mortgages altogether and often stopped renewing their funding on existing ones.
The supply of foreign funding dried up.
- Joshua Gans and Chris Joye have one - which they got mentioned with approval at the 2020 Summit;
- Members Equity, run by union super funds, is getting funding directly from the super funds, which is a good deal for all concerned; and now
- The Reserve Bank is itself as good as buying mortgages by lending money against them in the place of foreigners, which is also a good deal all round, as Alan Kohler points out in Business Spectator and Crikey and below the fold:
"Apparently there’s now a free lunch.
The Reserve Bank’s cost of funds is 25 basis points under the cash rate, or 7 per cent, and in the past two days it has lent $1.1 billion to the banks at between 7.45 and 7.99 per cent on the security of residential mortgage backed securities (RMBS) discounted by a 10 per cent haircut.
The banks, in turn, get to lend that money at up to 200 points over the swap rate, or 9.5 per cent.
The RBA makes a profit on the deal and gets very good security at a discount; the banks make a profit because having increased their lending rates by more than the official cash rate, their spreads have widened enough for it to be worth going to the government pawnbroker for cash. As a result the RBA now holds $2.1 billion worth of RMBS on which it has lent $1.9 billion.
The RBA’s sudden increase in RMBS repurchasing is not happening, you understand, because the Australian banks are in trouble and can’t finance their loan books - it’s just a good deal for all and helps provide a bit of extra liquidity.
Except that this is so unusual, and is so at odds with the RBA’s stance of tightening monetary policy to combat inflation, that it either reflects a "locked up" residential mortgage market, as the treasurer of one investment bank suggested, or part of a coordinated global action by all central banks to flood the system with liquidity to restart the banking engine.
Indeed last night the Bank of England announced a similar, but much larger, special liquidity scheme, in which it will swap any amount of RMBS for government bonds.
Governor Mervyn King said "discussions with the banks" indicated that initial use of the scheme would be £50 billion ($A105 billion), but the Chancellor of the Exchequer,
Alistair Darling, later came out and said it could be more than that, and The Times suggested it could go as high as £100 billion.
Financial Times columnist Willem Buiter won the "prediction auction" with a bid of £250 billion, which he says the Bank of England will have to inject before victory can plausibly be declared.
The UK banks are in far greater non-trouble than Australian banks; in fact the UK mortgage market is in the process of collapse.
House prices are falling steeply and the wholesale, interbank funding market is paralysed.
In the US the Federal Reserve Board is still shovelling liquidity out to the banks under various swap and repo schemes that are also, like the new UK scheme, unlimited.
Basically central banks are underpinning the western world’s banking system at present and ensuring that loans are continuing to be advanced and a recession-inducing credit crunch does not result from the banks’ sudden, shocking, discovery of counter-party risk.
In normal circumstances, pawning RMBS like this would be both inflationary and morally hazardous (bailing banks out of their mistakes) but these are not normal times.
It is both a relief and scary that the central banks are doing it, and that even the Reserve Bank of Australia is repurchasing RMBS for 12 months. It confirms that the system is broken - and will be for 18 months according to CBA chief Ralph Norris - but it also confirms that the central banks are prepared to do whatever it takes to deal with the problem.
In Australia the RBA’s repurchasing over the past few days also surely marks a clear turning point of monetary policy.
This has been assumed from its speeches and minutes in the past week or two, with forecasters now generally slipping an early 2009 rate cut into their models - why would the RBA start giving cash to the banks for as little as 20 basis points above cash for 12 months if the cash rate wasn’t coming down?"